The Impact of AMP Cap Changes: A Warning for Plan Sponsors

Examining the effects in the Commercial market and the need for solutions that prioritize financial well-being of plan sponsors.

As part of the American Rescue Plan (ARP) of 2021, a provision was added effective January 2024, where a legacy cap on the total amount of rebates that Medicaid can collect from manufacturers based on their pricing was eliminated. 

Important background information: Average Manufacturer Price (AMP) is one of the many indices used for pharmacy pricing. Specifically, AMP is the average price that wholesalers and other large purchasers pay manufacturers for drugs that are sold to retail pharmacies.

The AMP was created in the Omnibus Budget Reconciliation Act (OBRA) of 1990 for Medicaid’s Drug Rebate Program and is a benchmark that determines rebates that manufacturers pay for Medicaid beneficiary purposes. The Medicaid rebate for generic drugs is 13% of AMP.

The Medicaid rebate for brand drugs is subject to a formula of the greater of (a) 23.1% of the AMP or the difference between the AMP and the “best price” (which is basically the lowest price paid by anyone). This formula essentially gives Medicaid the guarantee of the best pricing across payors via the rebate.

Finally, there has been a cap on the amount this rebate formula can pay. That cap is 100% of the AMP. In other words, the cap would prevent the manufacturer from having to rebate more than their total revenue for the drug (losing money on every purchase).  The cap has been in place since 2010 but was removed as part of ARP, bringing us back, full circle, to the purpose of this article!

The rebate cap served as a marker, which ensured that:

  1. Manufacturers weren’t paying more than their income in rebates
  2. Medicaid programs wouldn’t receive rebates over the AMP. Meaning they wouldn’t receive rebates that exceeded the sale price of the drug.   

But now that cap is gone. Whether a good or bad thing, it causes ripple effects.

This policy change has created multiple reactions from both drug manufacturers and Pharmacy Benefit Managers (PBMs) and this article both examines its effects in the Commercial market and underscores the need for innovative solutions that prioritize the financial well-being of commercial and other types of plan sponsors.   

AMP Cap Changes: A Shift in Manufacturer Strategies   

The elimination of the Medicaid rebate cap threatened certain drugs to go “underwater” for their manufacturers, leading those manufacturers to consider ceasing production of them, or to change pricing to reduce the chances of the negative consequences occurring.

We’ve seen both situations occur in the market since this became law. Drugs coming off the market as a result of this carries all sorts of incremental risks, such as supply shortages, which could be an article unto itself.

But our focus here is the other implication, changes in pricing, as we observed the insulin manufacturers (Eli Lilly, Novo Nordisk, and Sanofi) reduce their Wholesale Acquisition Cost (WAC) of select insulin products before the 2024 deadline. By doing so, they aim to protect their operations, avoiding a rebate requirement exceeding the AMP.

While these changes were in response to Medicaid legislation, this price reduction has broader implications on Commercial benefit plan business as well, as evidenced by PBM actions. For example, with the lowering of the WAC for certain insulins, the associated commercial rebates (paid to PBMs for plan sponsor utilization) were reduced as well.

PBM Responses: Navigating the Complexities   

This resulted in PBMs adapting by implementing various strategies to address this reduction in rebates offered for insulin products. They are often able to implement these changes without warning because their contracts will permit this action, via specific provisions, such as “Reservation of Rights.”

Some of the strategies we have observed:

  1. Rebate “Adjustment” Language Requirements: Many PBMs are incorporating rebate adjustment language into their contracts (or simply applying the adjustments as permitted via the existing contract) to account for these changes. Typically this results in the PBM taking ‘credit’ for manufacturers’ lower list prices, via its rebates owed to the plan. In other words, even though this change to price is not a rebate, the PBM counts it towards their rebate commitments.
  2. Exclusion of Insulin from Rebate Guarantees: In response, some PBMs are simply excluding insulin and/or test strips from minimum rebate guarantees entirely or lowering the defined contractual minimum rebate guarantee due to this ‘market event’. This may result in dramatic reductions in rebates earned, which may significantly impact plan sponsors’ bottom line. The argument may be made that prices decreased and therefore the lower rebates are offset, however, this wasn’t a $1 for $1 change, and the plan sponsor must always watch exceedingly carefully for the underlying alignment of incentives in the contract. Anytime the PBM earns more money on a particular drug, the consequences can be significant.  
  3. Requiring Insulin Formulary Changes:  Some PBMs are also implementing changes in formulary requirements to limit access to a different subset of insulins, seeking to maximize the underlying economics or other PBM objectives. The question is “how to ensure these changes are in the plan’s best interests?”

These provisions have different names and are often well hidden in contractual provisions, and so Caveat Emptor always applies.  

Plan sponsors should carefully review any new or changing contract language around rebate adjustments and consult legal counsel to fully understand these implications. Furthermore, sponsors should ask their PBM what, if any, implications will occur from the AMP Cap removal and subsequent insulin price reductions on their contract.  

The Imperative for Plan Sponsors: Innovative Solutions to Address Change 

As the pharmaceutical landscape undergoes these intricate transformations, plan sponsors face the challenge of ensuring stability and financial well-being for their beneficiaries. The need for innovative solutions that prioritize plan sponsor interests becomes paramount. Plan sponsors should seek pharmacy partners committed to alignment of incentives above all else. This includes:

  • Stability: Solutions that provide a stable pricing environment and formulary structure amidst changing market dynamics.   
  • Transparency: Clear and transparent communication regarding cost, guarantees, and formulary changes. All parties must understand the implications of change.   
  • Client Empowerment: Strategies that empower plan sponsors with the tools and insights needed to be informed and predict how any change impacts them specifically.   

Protecting Our Clients from these and other Market Events 

Amidst this backdrop of change, SlateRx’s program is delivering clients complete protection against these (and other) changes, including price index guarantees, the preservation of rebate language, and maintenance of the optimal formulary strategy. This means no patient impact, no contract changes including rebate adjustments, and additional guarantees to ensure price fluctuations throughout the year remain managed.

We encourage plan sponsors to ask the questions, and challenge the status quo, as pharmacy cost trend simply can not continue. We welcome anyone interested in learning more, to reach out to their SlateRx representative or contact us here.